International · International transfer pricing 2009 iv Nick Raby is the principal in charge of transfer pricing services for PricewaterhouseCoopers in the Western Region of the United

Internationaltransfer pricing

2009

This publications has been prepared for general guidance on matters of interest only,and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. Norepresentation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, orrefraining to act, in reliance on the information contained in this publication or for anydecision based on it.

©2009 PricewaterhouseCoopers. All rights reserved. ‘PricewaterhouseCoopers’ refersto network of member firms of PricewaterhouseCoopers International Limited, eachof which is a separate and independent legal entity.

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Preface

It is my pleasure to present the 2009 edition of our International transfer pricingbook. There have continued to be significant changes in the area of transfer pricingsince our prior year edition, with several new countries implementing either formal orinformal transfer pricing documentation requirements in the past twelve months.

Part I of the book provides a general overview of the global approach to transferpricing issues. Part II is devoted to a summary survey of specific requirements of thekey countries with transfer pricing rules.

We anticipate that 2009 will be an exciting year for transfer pricing as several majorterritories adopt new or revised requirements for transfer pricing, and as the impactof the OECD’s discussion draft on business restructurings is evaluated. We alsoanticipate an increase in disputes globally as more and more tax authorities attemptto enforce their transfer pricing rules aggressively. It is PricewaterhouseCoopers’sview that strategic dispute management (such as through dispute avoidance orresolution techniques) on a global basis will become increasingly crucial in companies’efforts to sustain their global transfer pricing strategies.

We look forward to working with you in 2009 and beyond.

Best regards,

Garry Stone, Ph.D.Global transfer pricing leaderPricewaterhouseCoopers LLP (US)

International transfer pricing 2009

ii

This book provides general guidance to the reader on a range of transfer pricingissues. Technical material is updated with each new edition and this book is correctas at 1 April 2008. In hard copy form, this 2009 edition is the latest development of awork begun well over a decade ago and is now in its eleventh iteration.

In addition to this reference volume, many of our readers also require real-timeaccess to current information. Readers wishing to receive news alerts on currenttransfer pricing developments by email can register for this service at no charge bysending an email request entitled ‘Pricing Knowledge Network Registration’ to theauthor at [email protected].

A major and growing problem facing multinational enterprises is the issue ofpreparing documentation to demonstrate compliance with transfer pricing rulesacross multiple jurisdictions. More and more countries have establisheddocumentation rules that require companies to state clearly and with supportingevidence why their transfer pricing policies comply with the arm’s length standard.Many jurisdictions have also implemented strict penalty regimes to encouragetaxpayers’ compliance with these new procedures. However, some of the biggestchallenges facing taxpayers in their efforts to abide by these requirements are thesubtle differences in transfer pricing documentation expected across the various taxjurisdictions. These conflicting pressures need to be reviewed and managed verycarefully, both to meet the burden of compliance and to avoid costly penalties.

As more tax authorities impose formal and informal documentation requirementsto support taxpayers’ inter-company pricing policies, as well as establish aggressiveaudit teams to review compliance, the risk of being assessed material adjustmentsand penalties becomes greater. For many years, companies have accepted nominaladjustments as a small price to be paid to get rid of the tax auditor. In the currentenvironment, however, adjustments have now become potentially so material thatcompanies cannot simply write off assessed adjustments without recourse. Thesedevelopments are reflected in the increasing use of mutual agreement proceduresunder bilateral double taxation agreements, or the Arbitration Convention within theEuropean Union, in order to seek relief from double taxation and unsustainableproposed adjustments. This, in turn, necessitates a more controlled and organisedapproach by companies to handling the audits as they take place, to ensure theprocess is conducted efficiently and that any areas where the transfer pricing systemis deficient are corrected rapidly. Today, a properly coordinated defence strategy is abasic necessity rather than an expensive luxury.

In this book, my fellow authors and I demonstrate that transfer pricing is a matterthat is of fundamental importance to multinational enterprises. It is vital for everycompany to have a coherent and defensible transfer pricing policy, which is responsiveto the very real climate of change in which companies are operating. A sound transferpricing policy must be developed within a reasonable timescale and be invested in byboth company management and professional advisers. It needs to be re-examinedregularly to allow for changes in the business, perhaps as the result of acquisitionsor divestments of part of the group. We have tried to provide practical advice whereverpossible on a subject where the right amount of effort can produce significant dividendsin the form of a low and stable tax burden, coupled with the ability to defend acompany against tax auditor examination. Naturally, no work of this nature cansubstitute for a specialist’s detailed professional advice on the specific facts relevant

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Preface

to a particular transfer pricing issue. However, our hope is that, with the assistance ofthis book, the reader can contemplate inter-company pricing considerations withgreater assurance.

Nick RabyPricewaterhouseCoopers LLP (US)


iv

Nick Raby is the principal in charge of transfer pricing services forPricewaterhouseCoopers in the Western Region of the United States, and has extensiveexperience in advising on transfer pricing and tax planning for multinational companies.His international experience includes six years in London, and three in Brussels andAmsterdam. Many members of the PricewaterhouseCoopers international networkof transfer pricing specialists have contributed to this book over the years. In particular,thanks are due this year to the following individuals who have edited their countrymaterials in this edition.

Country Name

Africa Jacques Van-RhynNerma HartmanPatty Karuaihe-MartinJanet Kabiru

Argentina Violeta MarescaJuan Carlos Ferreiro

Australia Nick HousemanCameron SmithKerry LambrouSarah Stevens

Austria Herbert GreineckerAzerbaijan Movlan PashayevBelgium Patrick Boone

Xavier Van VlemShana Vroman

Brazil Nélio WeissCassius Carvalho

Bulgaria Georgy SarakostovGinka IskrovaEkaterina Dimitrova

Canada Saul PlenerAndrew McCrodan

Chile Roberto Carlos RivasCarolina Céspedes

China Spencer ChongCecilia LeeJeff YuanWinnie Di

Colombia Carlos Mario LafaurieRafael Parra

Croatia Janos KelemenDr. Ivo BijelicMatija Vukušic

Czech Republic David BorkovecNatalia Pryhoda

v

Country Name

Preface

Denmark Jørgen Juul AndersenAnne Mette Nyborg

Ecuador Pablo AguirreMaría Jose AlarcónCesar Ortiz

Estonia Villi TõntsonFinland Merja Raunio

Elina GerdtJarno Mäkelä

France Pierre EscautMarie-Laure Hublot

Georgia Sergi KobakhidzeMatthew Tallarovic

Germany Lorenz BernhardtHungary Zaid SethiIceland Ásta Kristjánsdóttir

Valdimar GuðnasonIndia Dhaivat Anjaria

Shyamal MukherjeeIndonesia Ay-Tjhing PhanIreland Mary Honohan

Gavan RyleBarbara Abrantes

Israel Gerry SeligmanVered KirshnerAdi Bengal-Dotan

Italy Gianni ColucciMarco Meulepas

Japan Akio MiyamotoRyann ThomasToshiyuki Kurauchi

Kazakhstan Courtney FowlerCarmen CancelaZaure NurovaAlmas Nakipov

Korea Henry AnHeui-Tae LeeJoon YangWonyeob Chon

Latvia Ilze BergaArtûrs BreicisAgate Zîverte

Lithuania Nerijus NedzinskasMartynas NovikovasArnas Laurynas


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Country Name

Luxembourg Geetha Hanumantha RaoMalaysia Thanneermalai Somasundaram

Jagdev SinghMexico Fred J. Barrett

Mauricio HurtadoGabriel MaciasRaúl Sicilia

Netherlands Arnout van der RestFrans BlokJeroen Peerbooms

New Zealand Michael BignellGeraldine Chan

Norway Ola Nicolai BorgeØystein AndalMorten Beck

Peru Rudolf RöderMiguel PugaRodrigo LopatinFernando Becerra

Philippines Carlos T. Carado IIAlexander B. CabreraRoselle K. Yu

Poland Piotr WiewiórkaSebastian LebdaMarcin ZbierskiMaja Seliga-Kre

Portugal Leendert VerschoorJaime EstevesJorge FigueiredoClara Madalena Dithmer

Romania Ionut SimionBlanca Kovar

Russia Svetlana StroykovaMaria Parygina

Singapore Nicole FungSlovakia Christiana Serugová

Alexandra JašicováMichaela GábikováMartin Hornák

Slovenia Janos KelemenTina KlemencVid Cibej

Spain Javier González CarcedoMichael Walter

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Country Name

Preface

Sweden Mika MyllynenJérõme Monsenego

Switzerland Norbert A. RaschleRolando LardelliNicolas Bonvin

Taiwan Steven GoYishian LinWendy ChiuDave Barberi

Thailand Peerapat PoshyanondaJanaiporn Khantasomboon

Turkey Zeki GunduzCanan AladagOzgur Bayraktar

UK Victoria HorrocksGareth Williams

USA Nick RabyVu P. TranMatias Pedevilla

Uruguay Leonardo DecarliniMaria Jose Santos

Uzbekistan Abdulkhamid MuminovAkmal Rustamov

Venezuela Luis Fernando MirandaJosé Gregorio GarciaMaría Carolina SanchezJosé Rafael Monsalve

Vietnam Dinh Thi Quynh VanKhuc ChienTruong Phuong Thao

This work also builds on the efforts of many individuals, not listed here, who contributedideas and words to earlier editions.

The author would also like to express his gratitude to the editorial team for thisedition, which consisted of Vu Tran, Matias Pedevilla, Henry An, Mika Myllynen, Arnoutvan der Rest, Marcus Hammarstrand and Dana Hart.

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Glossary

Advance pricing agreements (APAs): Binding advance agreements between the taxauthorities and the taxpayer that set out the method for determining transfer pricingfor inter-company transactions.

Arm’s length principle: The arm’s length principle requires that transfer prices chargedbetween related parties are equivalent to those that would have been charged betweenindependent parties in the same circumstances.

Berry ratio: A ratio sometimes used in transfer pricing analyses, equal to grossmargin divided by operating expenses.

Comparable profits method (CPM): A transfer pricing method based on thecomparison of the operating profit derived from related party transactions with theoperating profit earned by third parties undertaking similar business activities.

Comparable uncontrolled price (CUP) method: A method of pricing based on theprice charged between unrelated entities in respect of a comparable transaction incomparable circumstances.

Competent authority procedure: A procedure under which different tax authoritiesmay consult each other to reach a mutual agreement on a taxpayer’s position.

Cost plus method: A method of pricing based on the costs incurred plus a percentageof those costs.

Double taxation treaty: A treaty made between two countries agreeing on the taxtreatment of residents of one country under the other country’s tax system.

Functional analysis: The analysis of a business by reference to the location offunctions, risks and intangible assets.

GATT: General Agreement on Trade and Tariffs.

Inland Revenue: The UK tax authority.

Intangible property: Property which is not tangible, e.g. patents, know-how,trademarks, brands, goodwill, customer lists.

Internal Revenue Service (IRS): The US tax authority.

OECD: The Organisation for Economic Co-operation and Development.

OECD Guidelines: Report by the OECD on transfer pricing entitled ‘Transfer PricingGuidelines for Multinational Enterprises and Tax Administrations’ published in July1995, with additional chapters subsequently issued.

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Glossary

Patent: Legal protection of a product or process invented or developed by the holderof the patent.

Permanent establishment (PE): A taxable business unit. Exact definitions vary indifferent countries and according to different double taxation treaties.

Profit split method: A method of pricing where the profit or loss of a multinationalenterprise is divided in a way that would be expected of independent enterprises in ajoint-venture relationship.

Resale price method: A method of pricing based on the price at which a product isresold less a percentage of the resale price.

Royalty: A payment (often periodic) in respect of property (often intangible), e.g. a sumpaid for the use of patented technology.

Tangible property: Physical property, e.g. inventory, plant, machinery and factories.

Thin capitalisation: A situation in which a company has a high level of borrowingrelative to its equity base. The term is usually used when the high levels of debt arederived from related companies.

Trademark: A name or logo associated with a particular product.

Trade name: A name or logo associated with a particular company or group ofcompanies.

Transactional net margin method (TNMM): A transfer pricing method based on ananalysis of the operating profit derived by a business from a particular related partytransaction or group of transactions.

Value added tax: A tax on products or services charged at the point of sale.

WTO: World Trade Organisation.

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Contents

Preface iGlossary viii

PART I: DEVELOPING DEFENSIBLE TRANSFER PRICING POLICIES

1 Introduction 1101 At the eye of the “perfect storm” 1102 The need for adequate planning and documentation of transfer pricing

policies and procedures 2103 Keeping policies and procedures up to date 2104 Theory and practice 3105 Transfer pricing is not just about taxation 3106 The legacy of the 1990s 4107 The future 4

2 Categories of inter-company transfer 6201 Introduction 6202 The arm’s length principle 6203 Sales of tangible property – definition 6204 Sales of machinery and equipment 7205 Sales of inventory 7206 Transfers of intangible property – definition 8207 Types of intangibles 9208 Modes of transfer of intangibles 9209 Manufacturing intangibles 9210 Marketing intangibles 10211 Hybrid intangibles 11212 The provision of services – definition 12213 Examples of types of service 12214 The problem of ‘shareholder’ services 13215 Financing transactions 16216 Financing short-term capital needs 17217 Market penetration payments 18218 Cost sharing 19219 Financing long-term capital needs 19220 Mortgages 19221 Lease financing 19222 Capital stock 20223 Long-term inter-company loans 20224 Other financing techniques 20225 Flexibility in managing capital needs 21

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3 The work of the OECD 22301 Introduction 22302 The arm’s length principle 23303 Comparable uncontrolled price method 25304 Resale price method 26305 Cost plus method 27306 Cost plus method – capacity adjustments 28307 Other methods 29308 Rate-of-return method 30309 Profit split method 31310 Transactional net margin method (TNMM) 33311 Berry ratio compared to return on sales (ROS) 33312 Non-arm’s length approach: global formulary apportionment 35313 OECD commentary on other matters impacting transfer pricing 35314 Recent developments at the OECD 37

4 Establishing a transfer pricing policy: practical considerations 41401 Arm’s length pricing: market prices 41402 Functional analysis 42403 Interviews 42404 Other information or documents required 43405 Functions 43406 Risks 45407 Intangibles 47408 Characterisation of businesses 48409 Contract manufacturers and fully-fledged manufacturers 48410 Characterisation of distribution/selling companies 50411 Goals of the multinational corporation 50412 Manufacturing opportunities 52413 Centralised support activities 52414 Selling companies 53415 Contract service providers 53416 Contract research and development 53417 Other reasons for establishing contract research and development 54418 Contract maintenance 55419 Contract marketing 55420 The evaluation of pricing options 55421 The search for comparables 56422 Identifying appropriate comparables 58423 Internal comparables 58424 External comparables 59425 Functional analysis and comparable information – an overview 59426 Documentation 60427 How to document a policy 60428 Financial analyses 61429 Evaluation of financial analyses 62430 Transfer pricing policy 63


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431 Transfer pricing guidelines 63432 Inter-company agreements 63433 Documentation of the functional analysis 63434 Documenting the comparables 63435 Income statements 64436 Industry evidence 64437 Implementing a transfer pricing policy 64438 Monitoring the application of the policy 64439 Compensation of management 65

5 Specific issues in transfer pricing 66

MANAGEMENT SERVICES501 Management fees – introduction 66502 The importance of management fees 66503 The tax treatment of management fees – an overview 67504 Management fees in the developed world 67505 Dealing with shareholder costs 67506 Analysing the services 68507 The cost base for service charges 70508 The cost-accounting method 70509 The computation on a full cost basis 70510 When should a profit margin be added to cost? 71511 The determination of an arm’s length service charge 72512 Documentation 73

TRANSFER OF INTANGIBLE PROPERTY513 Transfer of intangibles – introduction 74514 Sale for consideration 75515 Licence 75516 Determination of arm’s length royalty rates 76517 Determining an arm’s length royalty rate in the absence of perfect

comparables 77518 Super-intangibles 77519 Valuation of royalty rates for super-intangibles 78

COST SHARING520 Cost sharing – introduction 79521 Advantages of cost sharing 80522 Cost sharing arrangements 80523 Cost sharing agreements 81524 Allocation of costs among participants 81525 Deductibility of cost sharing payments 82526 Cost sharing adjustments 84527 Cost sharing and risk 84528 The participants 85529 Establishing cost sharing arrangements in mid-stream 85530 Buy-in arrangements 85

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531 Ownership of intangibles 87532 Other types of cost sharing agreements 89

FOREIGN EXCHANGE AND FINANCE533 Foreign exchange risk – introduction 89534 The arm’s length standard 89535 Types of exchange rate exposure 90536 Translation exposure 90537 Transaction exposure 90538 Economic exposure 90539 Planning opportunities 91540 Loans and advances 92541 Characterisation of loans 92542 Interest on loans 92543 Loan guarantees 93544 Bona fide leases 93545 Establishing an arm’s length rental rate 94

E-BUSINESS546 Introduction 94547 Transfer pricing issues for the business community 94548 Issues for tax authorities 95

6 Managing changes to a transfer pricing policy 96601 Introduction 96602 Transfer pricing committee 96603 Setting the group’s initial pricing policy 97604 Active planning of the global tax charge 97605 Change in the operating structure of the company 98606 Parent company pressure 98607 Tax audit settlements 99608 Problems with current policy 99609 Making corrections through fine-tuning 100610 Massive change: alteration to business reality 100611 Changes in law 101612 Dealing with major changes 103613 Year-end adjustment 103614 Retroactive price changes 104615 Defensible late adjustments 104616 Timing of changes 106617 ‘Big bang’ or gradual 106618 Communicating the changes to the tax authorities 106619 Tax return disclosure 107620 Accounting disclosure 107621 Impact on banks and other users of the financial statements 107622 Communicating the changes to employees 107623 Impact on management/employee bonus schemes 108


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624 Accounting systems 108625 The audit trail 109626 Documenting the changes 109

7 Dealing with an audit of transfer pricing by a tax authority 110701 Introduction 110702 Establishing control of the audit process 111703 Minimising the exposure 112704 Settling the matter – negotiation, litigation and arbitration 112705 Preparation 113706 Dealing with adjustments to existing pricing arrangements 114707 Advance rulings 114

8 Financial services 116801 Introduction 116802 Regulation 116803 Global integration 116804 Complexity and speed 117805 Capital 117806 Branch profit allocation 117807 Economic analysis 117

BANKING AND CAPITAL MARKETS808 Introduction 118809 Global trading 118810 Fee-based businesses 119811 Treasury and funding 119812 Cross-border services 119813 Other issues in banking and capital markets 120

INSURANCE814 Introduction 120815 Reinsurance 121816 Centralisation 124817 Investment and asset management 124818 Financing and financial guarantees 124819 Brokerage and agency activities 125820 Other issues in insurance 125

INVESTMENT MANAGEMENT821 Introduction 125822 Asset management 127823 Marketing, distribution and client servicing 127824 Administration and other centralised activities 127

9 US transfer pricing rules 129

INTRODUCTION901 The importance of the US rules on transfer pricing 129

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902 The rationale underlying the US Regulations 129903 The history of the US reform process 130904 Consistency between the US Regulations and the OECD Guidelines 131905 Transfer pricing audits in the US 131

THE US TRANSFER PRICING REGULATIONS906 The best method rule 132907 The arm’s length range 132908 Collateral adjustments and set-offs 133909 Impact of foreign legal restrictions 133910 Transfers of tangible property 133911 Transfers of intangible property 134912 Provision of intra-group services, use of intangible property and the

GlaxoSmithKline case 135913 The comparable profits method 137914 Profit split methods 137

COST SHARING915 The US cost sharing regulations 137916 A qualified cost sharing arrangement in the US 138917 Cost sharing: the intangible development area and related costs 139918 Cost sharing: determination of reasonably anticipated benefits 140919 IRS adjustments to a US participant’s cost-share 142920 Cost sharing: buy-in/buy-out payments 143921 Cost sharing: administrative requirements 145922 Proposed cost sharing regulations in summary 145

SERVICE REGULATIONS923 The US services regulations 146924 Services cost method 146925 Profit split method 147926 Contractual arrangements and embedded intangibles 147927 Ownership of intangibles 147928 Benefit test 147929 Pass-through costs 148930 Passive association benefits 148931 Stewardship and shareholder activities 148932 Stock-based compensation 149933 Shared services arrangements 149934 Financial guarantees 149935 Contractual relationships 149936 Contingent payments 150937 Documentation requirements 150

THE US PENALTY REGIME938 The final penalty regulations 150939 The reasonableness test 151940 The contemporaneous documentation requirement 152


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941 Principal documents 152942 Background documents 153943 FIN 48 153944 SEC Roadmap: Conversion of US GAAP to IFRS 154

COMPETENT AUTHORITY945 The 2006 Revenue procedure 155946 The scope of competent authority assistance 155947 When to request competent authority assistance 156948 Competent authority: pre-filing and post-agreement conferences 156949 Competent authority: small case procedures 157950 Competent authority: statute of limitation protective measures 157951 Competent authority: unilateral withdrawal or reduction of US-initiated

adjustments 158952 Competent authority: repatriation of funds following a transfer pricing

adjustment 158953 Interest and penalties 159

ADVANCE PRICING AGREEMENTS (APAS)954 APAs: US procedures 159955 Rollbacks 160956 Bilateral and unilateral APAs – impact on competent authority 160957 APAs for small business taxpayers and IRS-initiated APAs 160958 Developments in the APA program 161

COMPARISON WITH THE OECD TRANSFER PRICING GUIDELINES959 The best method rule 161960 Comparability analysis 161961 Market penetration strategies 162962 Arm’s length range 162963 What has to be at arm’s length? Setting prices versus evaluating

the result 162964 Traditional transactional methods 163965 Other methods 164966 Transactional net margin method (TNMM) 164967 Intangible property 164968 Periodic adjustments under the OECD Guidelines 165969 Services 165970 Documentation and penalties 166

10 Transfer pricing and indirect taxes 1671001 Customs duty implications 1671002 WTO Valuation Agreement 1671003 Relationship between customs and tax rules 1681004 Intangibles 1681005 The Brussels definition of value 1681006 Specific duties and fixed values 1691007 Sales taxes, value added taxes and excise duties 169

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Contents

1008 Antidumping duties / countervailing duties 1691009 Establishing a transfer pricing policy – technical considerations 1701010 Adjustments 1701011 Validation of the transfer price for customs purposes 1711012 Transfer prices below the acceptable customs value 1721013 Transfer price exceeds acceptable customs value 1731014 Alternative methods of valuation 1731015 Implementation of the customs pricing policy 1751016 Transfers of intangibles 1751017 Royalties and licence fees 1761018 Intangible assists 1771019 Interest 1781020 Computer software 1781021 Design, development, engineering and similar charges 1791022 The impact of transfer pricing policy changes 1791023 The impact of retrospective transfer price adjustments 1801024 The impact of international structure 1811025 Dealing with an audit of pricing by an indirect tax authority 1821026 Strategy based on balance and leverage 183

11 Procedures for achieving an offsetting adjustment 1851101 Introduction 1851102 Competent authority 185

EUROPEAN UNION ARBITRATION CONVENTION1103 Background 1861104 The scope of the Convention 1871105 The required level of control 1871106 Adjustments to profits 1871107 Mutual agreement and arbitration procedures 1881108 Serious penalty proceedings 1881109 The advisory commission 1891110 Resolution of the problem 1891111 Term of the Convention 1891112 Interaction with non-member states 1891113 Experience of the Convention 1901114 Further EU developments in transfer pricing 1901115 International updates in cross-border dispute resolution 191


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PART II: COUNTRY-SPECIFIC ISSUES

12 Africa regional transfer pricing 1941201 Introduction 194

SOUTH AFRICA, REPUBLIC OF1202 Introduction 1951203 Statutory rules 1951204 Controlled foreign companies 1971205 Other regulations 1971206 Legal cases 1981207 Burden of proof 1981208 Tax audit procedures 1981209 Resources available to the tax authorities 1991210 Use and availability of comparable information 1991211 Risk transactions or industries 1991212 Competent authority 2001213 Advance pricing agreements (APAs) 2001214 Anticipated developments in law and practice 2001215 Liaison with other authorities 2021216 OECD issues 2021217 Joint investigations 2021218 Thin capitalisation 202

KENYA1219 Introduction 2031220 Statutory rules 2041221 Controlled foreign companies 2051222 Other regulations 2051223 Legal cases 2051224 Burden of proof 2051225 Tax audit procedures 2061226 Resources available to the tax authorities 2061227 Use and availability of comparable information 2061228 Risk transactions or industries 2071229 Competent authority 2071230 Advance pricing agreements (APAs) 2071231 Anticipated developments in law and practice 2071232 Liaison with other authorities 2071233 OECD issues 2071234 Joint investigations 2071235 Thin capitalisation 208

NAMIBIA1236 Introduction 2081237 Statutory rules 2081238 Controlled foreign companies 2091239 Other regulations: Practice Note 2 of 2006 209

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Contents

1240 Legal cases 2101241 Burden of proof 2101242 Tax audit procedures and resources available to the tax authorities 2101243 Use and availability of comparable information 2111244 Risk transactions or industries 2111245 Advance pricing agreements (APAs) 2111246 Anticipated developments in law and practice 2121247 Liaison with other authorities 2121248 OECD issues 2121249 Joint investigations 2121250 Thin capitalisation 212

TANZANIA1251 Introduction 2131252 Statutory rules 2131253 Controlled foreign companies 2131254 Other regulations 2141255 Legal cases 2141256 Burden of proof 2141257 Tax audit procedures 2141258 Resources available to the tax authorities 2141259 Use and availability of comparable information 2141260 Risk transactions or industries 2151261 Competent authority 2151262 Advance pricing agreements (APAs) 2151263 Anticipated developments in law and practice 2151264 Liaison with other authorities 2151265 OECD issues 2151266 Joint investigations 2151267 Thin capitalisation 215

ZAMBIA1268 Introduction 2161269 Statutory rules 2161270 Controlled foreign companies 2181271 Other regulations 2181272 Legal cases 2191273 Burden of proof 2191274 Tax audit procedures 2191275 Resources available to the tax authorities 2191276 Use and availability of comparable information 2201277 Risk transactions or industries 2201278 Competent authority 2201279 Advance pricing agreements (APAs) 2201280 Anticipated developments in law and practice 2211281 Liaison with other authorities 2211282 OECD issues 2211283 Joint investigations 221


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1284 Thin capitalisation 221

13 Argentina 2221301 Introduction 2221302 Statutory rules 2231303 Other regulations 2261304 Legal cases 2281305 Burden of proof 2301306 Tax audit procedures 2301307 The audit procedure 2311308 Reassessments and the appeals procedure 2311309 Additional tax and penalties 2311310 Use and availability of comparable information 2321311 Limitation of double taxation and competent authority procedure 2321312 Advance pricing agreements (APAs) 2331313 Anticipated developments in law and practice 2331314 Liaison with customs authorities 2331315 OECD issues 2331316 Joint investigations 2331317 Thin capitalisation 233

14 Australia 2351401 Introduction 2351402 Statutory rules 2351403 Other regulations 2361404 Legal cases 2381405 Burden of proof 2381406 Tax audit procedures 2391407 The audit procedure 2401408 Revised assessments and the appeals procedure 2411409 Additional tax and penalties 2421410 Resources available to the tax authorities 2431411 Use and availability of comparable information 2431412 Anticipated developments in law and practice 2441413 Risk transactions or industries 2471414 Limitation of double taxation and competent authority proceedings 2471415 Advance pricing arrangements (APAs) 2481416 Liaison with customs and other authorities 2491417 OECD issues 2501418 Thin capitalisation 2501419 Management services and other services 2511420 Marketing and other intangibles 2511421 Research and development (R&D) tax concession rules 252

15 Austria 2531501 Introduction 2531502 Statutory rules 253

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Contents

1503 Other regulations 2531504 Legal cases 2531505 Burden of proof 2571506 Tax audit procedures 2571507 The audit procedure 2581508 Revised assessments and the appeals procedure 2581509 Additional tax and penalties 2581510 Resources available to the tax authorities 2591511 Use and availability of comparable information 2591512 Risk transactions or industries 2591513 Limitation of double taxation and competent authority proceedings 2591514 Advance pricing agreements (APAs) 2601515 Anticipated developments in law and practice 2601516 Liaison with customs authorities 2601517 OECD issues 2611518 Joint investigations 2611519 Thin capitalisation 2611520 Management services 261

16 Azerbaijan 2621601 Introduction 2621602 Statutory rules 2621603 Legal cases 2641604 Burden of proof 2641605 Tax audit procedures 2641606 Revised assessments and the appeals procedure 2641607 Additional tax and penalties 2641608 Resources available to the tax authorities 2641609 Use and availability of comparable information 2641610 Risk transactions or industries 2651611 Limitation of double taxation and competent authority proceedings 2651612 Advance pricing agreements (APAs) 2651613 Anticipated developments in law and practice 2651614 Liaison with customs authorities 2651615 OECD issues 2661616 Joint investigations 2661617 Thin capitalisation 2661618 Management services 266

17 Belgium 2671701 Introduction 2671702 Statutory rules 2671703 Administrative guidelines 2701704 Legal cases 2721705 Burden of proof 2731706 Tax audit procedures 2731707 The audit procedure 274


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1708 Revised assessments and the appeals procedure 2741709 Additional tax and penalties 2741710 Resources available to the tax authorities 2751711 Use and availability of comparable information 2751712 Risk transactions or industries 2761713 Advance pricing agreements (APAs) 2771714 Competent authorities 2781715 Anticipated developments in law and practice 2781716 Liaison with customs authorities 2781717 Joint investigations 2781718 Thin capitalisation 278

18 Brazil 2801801 Introduction 2801802 Statutory rules 2801803 Other regulations 2861804 Legal cases 2881805 Burden of proof 2891806 Tax audit procedures 2891807 The audit procedure 2891808 Assessments and penalties 2901809 Resources available to the tax authorities 2901810 Liaison with customs authorities 2911811 Limitation of double taxation and competent authority proceedings 2911812 Advance pricing agreements (APAs) 2911813 OECD issues 2921814 Disguised dividend distributions 2931815 Proposal to change Brazilian transfer pricing law 293

19 Bulgaria 2951901 Introduction 2951902 Statutory rules 2951903 Other regulations 2961904 Legal cases 2971905 Burden of proof 2971906 Tax audit procedures 2971907 Revised assessments and the appeals procedure 2971908 Additional tax and penalties 2971909 Resources available to the tax authorities 2981910 Use and availability of comparable information 2981911 Risk transactions or industries 2981912 Limitation of double taxation and competent authority proceedings 2981913 Advance pricing agreements (APAs) 2981914 Anticipated developments in law and practice 2981915 Liaison with customs authorities 299

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1916 OECD issues 2991917 Joint investigations 2991918 Thin capitalisation 2991919 Management services 299

20 Canada 3002001 Introduction 3002002 Statutory rules 3002003 Other regulations 3052004 Legal cases 3062005 Burden of proof 3152006 Tax audit procedures 3152007 The transfer pricing audit procedure 3162008 Reassessments and the appeals procedure 3172009 Additional tax and penalties 3182010 Resources available to the tax authorities 3192011 Use and availability of comparable information 3192012 Risk transactions or industries 3192013 Limitation of double taxation and competent authority proceedings 3202014 Advance pricing arrangements (APAs) 3222015 Anticipated developments in law and practice 3232016 Liaison with customs authorities 3232017 OECD issues 3242018 Joint investigations 3242019 Thin capitalisation 3242020 Intra-group services (management fees) 3252021 Qualifying cost-contribution arrangements 326

21 Chile 3272101 Introduction 3272102 Statutory rules 3272103 Other regulations 3282104 Cases 3282105 Burden of proof 3282106 Tax audit procedures 3292107 Advance pricing agreements (APAs) 3292108 Anticipated developments in law and practice 3292109 Liaison with customs authority and Central Bank of Chile 3292110 Tax treaty activities 3292111 OECD issues 329

22 China 3302201 Introduction 3302202 Statutory rules 3302203 Other regulations 3302204 Legal cases 3312205 Burden of proof 332


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2206 Information reporting 3322207 Audit targets 3342208 Audit information requests 3342209 The audit procedure and adjustments 3352210 Assessments and appeals procedure 3362211 Additional tax and penalties 3372212 Resources available to the tax authorities 3382213 Advance pricing arrangements (APAs) 3382214 Anticipated developments in law and practice 3382215 OECD issues 3382216 Joint investigations 3392217 Cost sharing 3392218 Anti-avoidance 3392219 Thin capitalisation 3402220 Special features 340

23 Colombia 3412301 Introduction 3412302 Statutory rules 3412303 Other regulations 3452304 Legal cases 3462305 Burden of proof 3462306 Tax audit procedures 3462307 The audit procedure 3472308 Additional tax and penalties 3472309 Use and availability of comparable information 3472310 Limitation of double taxation and competent authority procedure 3482311 Advance pricing agreements (APAs) 3482312 Anticipated developments in law and practice 3482313 Liaison with customs authorities 3482314 OECD issues 3482315 Joint investigations 348

24 Croatia 3492401 Introduction 3492402 Statutory rules 3492403 Other regulations 3492404 Legal cases 3492405 Burden of proof 3502406 Tax audit procedures 3502407 Revised assessments and the appeals procedure 3502408 Additional tax and penalties 3512409 Resources available to the tax authorities 3512410 Use and availability of comparable information 3512411 Risk transactions or industries 3512412 Limitation of double taxation and competent authority proceedings 3512413 Advance pricing agreements (APAs) 351

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2414 Anticipated developments in law and practice 3512415 Liaison with customs authorities 3512416 OECD issues 3512417 Joint investigations 3522418 Thin capitalisation 3522419 Management services 352

25 The Czech Republic 3532501 Introduction 3532502 Statutory rules 3532503 Reporting under the commercial code 3542504 Penalties and interest on late payments 3552505 Tax audit procedures 3552506 Transfer pricing practice 3562507 Anticipated developments 356

26 Denmark 3582601 Introduction 3582602 Statutory rules arm’s length principle 3582603 Legal cases 3622604 Burden of proof 3632605 Tax audits 3642606 Revised assessments and the appeals procedure 3652607 Resources available to the tax authorities 3652608 Comparability analysis 3652609 Risk transactions or industries 3672610 Limitation of double taxation and competent authority proceedings 3682611 Advance pricing agreements (APAs) and Binding Statement 3682612 Thin capitalisation 3692613 Recent developments in Danish law 3702614 Liaison with customs authorities 3712615 OECD issues 371

27 Dominican Republic 3722701 Introduction 3722702 Statutory rules 3722703 Legal cases 3722704 Burden of proof 3732705 Tax audit procedures 3732706 Risk transactions or industries 3732707 Advanced pricing agreements (APAs) 3732708 OECD Rules 373

28 Ecuador 3742801 Introduction 3742802 Statutory rules 3742803 Other regulations 377


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2804 Legal cases 3772805 Burden of proof 3772806 Tax audit procedures 3772807 Revised assessments and the appeals procedure 3782808 Additional tax and penalties 3782809 Resources available to the tax authorities 3782810 Use and availability of comparable information 3782811 Limitation of double taxation and competent authority proceedings 3792812 Advance pricing agreements (APAs) 3792813 Anticipated developments in law and practice 3792814 Liaison with customs authorities 3792815 OECD issues 3792816 Joint investigations 3802817 Thin capitalisation 3802818 Management services 380

29 Estonia 3812901 Introduction 3812902 Statutory rules 3812903 Other regulations 3842904 Legal cases 3842905 Burden of proof 3842906 Tax audit procedures 3852907 Revised assessments and the appeals procedure 3852908 Additional tax and penalties 3852909 Resources available to the tax authorities 3862910 Use and availability of comparable information 3862911 Risk transactions or industries 3862912 Limitation of double taxation and competent authority proceedings 3862913 Advance pricing agreements (APAs) 3862914 Anticipated developments in law and practice 3862915 Liaison with customs authorities 3862916 OECD issues 3872917 Joint investigations 3872918 Thin capitalisation 3872919 Management services 387

30 Finland 3883001 Introduction 3883002 Statutory rules 3883003 Other regulations 3903004 Legal cases 3913005 Burden of proof 3933006 Tax audit procedures 3933007 Assessments and the appeals procedure 3943008 Additional tax and penalties 3943009 Use and availability of comparable information 394

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Contents

3010 Risk transactions or industries 3953011 Limitation of double taxation and competent authority proceedings 3953012 Advance pricing agreements (APAs) 3953013 Anticipated developments in law and practice 3963014 Liaison with customs authorities 3963015 OECD issues 3963016 Joint investigations 396

31 France 3973101 Introduction 3973102 Statutory rules 3973103 Other regulations 3993104 New transfer pricing documentation requirements under consideration

in France 4003105 Legal cases 4013106 Burden of proof 4083107 Tax audit procedures 4083108 The audit procedure 4083109 Revised assessments and the appeals procedure 4093110 Additional tax and penalties 4093111 Resources available to the tax authorities 4103112 Use and availability of comparable information 4103113 Risk transactions or industries 4103114 Limitation of double taxation and competent authority proceedings 4103115 Advance pricing agreements (APAs) 4113116 Mutual agreement procedure (MAP) 4123117 Binding PE ruling 4133118 Liaison with customs authorities 4133119 OECD issues 4133120 Joint investigations 4143121 Thin capitalisation 414

32 Georgia 4163201 Introduction 4163202 Statutory rules 4163203 Other regulations 4173204 Legal cases 4173205 Burden of proof 4173206 Tax audit procedures 4173207 Revised assessments and the appeals procedure 4173208 Additional tax and penalties 4183209 Resources available to the tax authorities 4183210 Use and availability of comparable information 4183211 Risk transactions or industries 4183212 Limitation of double taxation and competent authority proceedings 4183213 Advance pricing agreements (APAs) 4183214 Anticipated developments in law and practice 418


xxviii

3215 Liaison with customs authorities 4183216 OECD issues 4193217 Joint investigations 4193218 Thin capitalisation 4193219 Management services 419

3 3 Germany 4203301 Introduction 4203302 Statutory rules 4203303 Other regulations 4223304 Legal cases 4233305 Burden of proof 4243306 Tax audit procedures 4253307 Field audits in practice 4273308 Revised assessments and the appeals procedure 4273309 Additional tax and penalties 4283310 Resources available to the tax authorities 4283311 Use and availability of comparable information 4293312 Risk transactions or industries 4313313 Limitation of double taxation and competent authority proceedings 4313314 Advance pricing agreements (APAs) 4323315 Anticipated developments in law and practice 4333316 Liaison with customs authorities 4333317 OECD issues 4333318 Joint investigations 4343319 Thin capitalisation / limitations on interest deductions 434

34 Hungary 4353401 Introduction 4353402 Statutory rules 4353403 Other regulations 4363404 Legal cases 4363405 Burden of proof 4363406 Tax audit procedures 4373407 Revised assessments and the appeals procedure 4373408 Additional tax and penalties 4383409 Resources available to the tax authorities 4383410 Use and availability of comparable information 4383411 Risk transactions or industries 4393412 Advance pricing agreements (APAs) 4393413 Anticipated developments in law and practice 4403414 OECD issues 4413415 Thin capitalisation 441

3 5 Iceland 4423501 Introduction 4423502 Statutory rules 442

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3503 Other regulations 4423504 Legal cases 4433505 Burden of proof 4433506 Tax audit procedures 4433507 Revised assessments and the appeals procedure 4433508 Additional tax and penalties 4433509 Resources available to the tax authorities 4443510 Use and availability of comparable information 4443511 Risk transaction or industries 4443512 Limitation of double taxation and competent authority proceedings 4443513 Advance pricing agreements (APAs) 4443514 Anticipated developments in law and practice 4443515 Liaison with customs authorities 4453516 OECD issues 4453517 Joint investigations 4453518 Thin capitalisation 4453519 Management services 445

36 India 4463601 Introduction 4463602 Statutory rules and regulations 4463603 Burden of proof 4493604 Tax audit procedure 4503605 Revised assessments and appeals procedure 4513606 Additional tax and penalties 4513607 Legal cases 4513608 Resources available to the tax authorities 4553609 Use and availability of comparables’ information 4563610 Liaison with customs authorities 4563611 Risk transactions or industries 4573612 Thin capitalisation 4573613 Management services 4573614 Limitation of double taxation and competent authority proceedings 4573615 OECD issues 4573616 Joint investigations 4583617 Anticipated developments in law and practice 4583618 Advance pricing agreements (APAs) 458

37 Indonesia 4593701 Introduction 4593702 Statutory rules 4593703 Other regulations 4593704 Burden of proof 4603705 Tax audit procedures 4603706 Tax objections and the appeals procedure 460


xxx

3707 Tax penalties 4613708 Resources available to the tax authorities 4613709 Use and availability of comparable information 4613710 Risk transactions or industries 4623711 Limitation of double taxation and competent authority proceedings 4633712 Advance pricing agreements (APAs) 4633713 Anticipated developments in law and practice 4633714 Liaison with customs authorities 4633715 Joint investigations 463

3 8 Ireland 4643801 Introduction 4643802 Statutory rules 4643803 Other regulations 4663804 Legal cases 4663805 Burden of proof 4673806 Tax audit procedures 4683807 The audit procedure 4683808 Revised assessments and the appeals procedure 4693809 Additional tax and penalties 4693810 Resources available to the tax authorities 4703811 Use and availability of comparable information 4703812 Risk transactions and industries 4703813 Limitation of double taxation and competent authority proceedings 4703814 Advance pricing agreements (APAs) 4713815 Anticipated developments in law and practice 4713816 Liaison with customs authorities 4723817 OECD issues 4723818 Joint investigations 4723819 Thin capitalisation 4723820 Management services 472

39 Israel 4733901 Introduction 4733902 Statutory rules 4733903 Burden of proof 476

40 Italy 4774001 Introduction 4774002 Statutory rules 4774003 Other regulations 4774004 Legal cases 4784005 Burden of proof 4824006 Tax audit procedures 4824007 The audit procedure 4834008 Additional tax and penalties 4834009 Resources available to the tax authorities 484

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4010 Use and availability of comparable information 4844011 Risk transactions or industries 4844012 Limitation of double taxation and competent authority proceedings 4844013 Advance pricing agreements (APAs) 4854014 Anticipated developments in law and practice 4854015 Liaison with customs authorities 4864016 OECD issues 4864017 Joint investigations 4864018 Interest payable deducibility 486

41 Japan 4884101 Introduction 4884102 Statutory rules and other regulations 4884103 Legal cases 4934104 Burden of proof 4944105 Tax audit procedures 4944106 The audit procedure 4954107 Resourse options 4954108 Additional tax and penalties 4964109 Resources available to the tax authorities 4964110 Use and availability of comparable information 4964111 Limitation of double taxation and competent authority negotiations 4974112 Advance pricing agreements (APAs) 4984113 OECD issues 499

42 Kazakhstan 5004201 Introduction 5004202 Statutory rules 5004203 Other regulations 5014204 Legal cases 5014205 Burden of proof 5014206 Tax audit procedures 5014207 Revised assessments and the appeals procedure 5024208 Additional tax and penalties 5024209 Recources available to the tax authorities 5024210 Use and availability of comparable information 5024211 Risk transactions or industries 5034212 Limitation of double taxation and competent authority proceedings 5034213 Advance pricing agreements (APAs) 5034214 Anticipated developments in law and practice 5034215 Liaison with customs authorities 5044216 OECD issues 5044217 Joint investigations 5044218 Thin capitalisation 5044219 Management services 504


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43 Korea 5054301 Introduction 5054302 Statutory rules 5054303 Other regulations 5064304 Legal cases 5074305 Burden of proof 5074306 Tax audit procedures 5074307 Domestic tax appeals procedure and MAPs 5084308 Additional tax and penalties 5084309 Resources available to the tax authorities 5104310 Use and availability of comparable information 5104311 Risk transactions or industries 5104312 Limitation of double taxation and MAPs 5104313 Advance pricing agreements (APAs) 5104314 Anticipated developments in law and practice 5114315 Liaison with customs authorities 5114316 OECD issues 5114317 Joint investigations 5124318 Thin capitalisation 512

44 Latvia 5134401 Introduction 5134402 Statutory rules 5134403 Other regulations 5144404 Legal cases 5144405 Burden of proof 5154406 Tax audit procedures 5154407 Revised assessments and the appeals procedure 5154408 Additional tax and penalties 5154409 Resources available to the tax authorities 5164410 Use and availability of comparable information 5164411 Risk transactions or industries 5164412 Limitation of double taxation and competent authority proceedings 5174413 Advance pricing agreements (APAs) 5174414 Anticipated developments in law and practice 5174415 Liaison with customs authorities 5174416 OECD issues 5174417 Joint investigations 5174418 Thin capitalisation 5184419 Management services 518

45 Lithuania 5194501 Introduction 5194502 Statutory rules 5194503 Other regulations 5194504 Legal cases 5194505 Burden of proof 519

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Contents

4506 Tax audit procedures 5194507 Revised assessments and the appeals procedure 5204508 Additional tax and penalties 5204509 Resources available to the tax authorities 5204510 Use and availability of comparable information 5204511 Risk transactions or industries 5204512 Limitation of double taxation and competent authority proceedings 5204513 Advance pricing agreements (APAs) 5204514 Anticipated developments in law and practice 5204515 Liaison with customs authorities 5214516 OECD issues 5214517 Joint investigations 5214518 Thin capitalisation 5214519 Management services 521

46 Luxembourg 5234601 Introduction 5234602 Statutory rules, other guidelines and legal cases 5234603 Tax audits and resources available to the tax authorities 5244604 Availability of comparable information 5244605 Advance pricing agreements (APAs) 524

47 Malaysia 5254701 Introduction 5254702 Statutory rules 5254703 Legal cases 5274704 Burden of proof 5274705 Tax audit procedures 5274706 The audit procedure 5294707 Revised assessments and the appeals procedure 5324708 Additional tax and penalties 5324709 Resources available to the tax authorities 5334710 Use and availability of comparable information 5334711 Risk transactions or industries 5344712 Limitation of double taxation and competent authority proceedings 5354713 Advance pricing agreements (APAs) 5354714 Liaison with customs authorities 5354715 OECD issues 5354716 Joint investigations 5364717 Thin capitalisation 536

48 Mexico 5374801 Introduction 5374802 Statutory rules 5374803 Other regulations 5424804 Legal cases 5444805 Burden of proof 545


xxxiv

4806 Tax audit procedures 5454807 The audit procedure 5464808 Revised assessments and the appeals procedure 5474809 Additional tax and penalties 5484810 Resources available to tax authorities 5484811 Use and availability of comparable information 5494812 Risk transactions or industries 5494813 Limitation of double taxation and competent authority proceedings 5494814 Advance pricing agreements (APAs) 5504815 Anticipated developments in law and practice 5514816 Liaison with customs authorities 5534817 OECD issues 5534818 Joint investigations 5544819 Thin capitalisation 554

49 The Netherlands 5554901 Introduction 5554902 Statutory rules 5554903 Other regulations 5574904 Legal cases 5604905 Burden of proof 5614906 Tax audit procedures 5614907 The audit procedure 5624908 Revised assessments and the appeals procedure 5634909 Additional tax and penalties 5634910 Resources available to the tax authorities 5644911 Use and availability of comparable information 5644912 Risk transactions or industries 5654913 Limitation of double taxation and competent authority proceedings 5654914 Advance pricing agreements (APAs) 5664915 Anticipated developments in law and practice 5674916 Liaison with customs authorities 5674917 OECD issues 5694918 Joint investigations 5694919 Thin capitalisation 569

50 New Zealand 5705001 Introduction 5705002 Inland Revenue’s current focus 5705003 Inland Revenue’s review mechanism 5715004 Statutory rules 5725005 Guidance on applying New Zealand’s transfer pricing rules 5735006 Legal cases 5765007 Burden of proof 5765008 Tax audit procedures 5775009 The audit procedure 5785010 Revised assessments and the appeals procedure 578

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Contents

5011 Additional tax and penalties 5795012 Resources available to the tax authorities 5795013 Use and availability of comparable information 5795014 Risk transactions or industries 5805015 Limitation of double taxation and competent authority proceedings 5815016 Advance pricing agreements (APAs) 5815017 Liaison with customs authorities 5815018 OECD issues 5825019 Joint investigations 5825020 Thin capitalisation 582

51 Norway 5835101 Introduction 5835102 Statutory rules 5835103 Other regulations 5845104 Legal cases 5855105 Burden of proof 5895106 Tax audit procedures 5905107 The audit procedure 5915108 Revised assessments and the appeals procedure 5915109 Additional tax and penalties 5915110 Resources available to the tax authorities 5915111 Use and availability of comparable information 5925112 Risk transactions or industries 5935113 Limitation of double taxation and competent authority proceedings 5935114 Advance pricing agreements (APAs) 5935115 Documentation requirements 5935116 Liaison with customs authorities 5945117 OECD issues 5945118 Joint investigations 5955119 Thin capitalisation 595

52 Peru 5965201 Introduction 5965202 Statutory rules 5965203 Other regulations 5985204 Advance pricing agreements (APAs) 5995205 Burden of proof 5995206 Tax audit procedures 5995207 Legal cases 6005208 Resources available to the tax authorities 6015209 Use and availability of comparable information 6015210 Risk transactions or industries 6025211 OECD issues 6025212 Joint investigations 602


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5 3 Philippines 6035301 Introduction 6035302 Statutory rules 6035303 Other regulations 6035304 Legal cases 6045305 Anticipated developments 6045306 Burden of proof 6055307 Tax audit procedures 6055308 The audit procedures 6055309 Appeals procedures 6065310 Additional tax and penalties 6065311 Resources available to the tax authorities 6065312 Risk transactions 6075313 Thin capitalisation 6075314 Advance pricing agreements (APAs) 6085315 Joint investigations 6085316 OECD issues 608

54 Poland 6095401 Introduction 6095402 Statutory rules, other guidelines 6095403 Legal cases 6125404 Burden of proof 6125405 Tax audit procedures 6125406 Comparable information 6135407 Competent authority proceedings and advance pricing

agreements (APAs) 6135408 Liaison with customs and other tax authorities 6155409 Thin capitalisation 6155410 Management services 615

5 5 Portugal 6165501 Introduction 6165502 Statutory rules 6165503 Other regulations 6185504 Legal cases 6195505 Burden of proof 6195506 Documentation 6195507 Tax audit procedures 6215508 Revised assessments and the appeals procedure 6225509 Additional tax assessment and penalties 6225510 Resources available to the tax authorities 6225511 Use and availability of comparable information 6235512 Risk transactions or industries 6235513 Limitation of double taxation and competent authority proceedings 6235514 Advance pricing agreements (APAs) 6245515 Anticipated developments in law and practice 624

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5516 Liaison with customs authorities 6245517 OECD issues 6245518 Joint investigations 6245519 Thin capitalisation 625

56 Romania 6265601 Introduction 6265602 Statutory rules 6265603 Risk transactions or industries and legal cases 6285604 Burden of proof and tax audit procedures 6295605 Comparable information 6295606 Additional taxes and penalties 6295607 Inter-company loans 6295608 Liaison with customs authorities 631

57 Russia 6325701 Introduction 6325702 Statutory rules 6335703 Other regulations 6365704 Legal cases 6375705 Burden of proof 6375706 Tax audit procedures 6385707 Additional tax and penalties 6395708 Resources available to the tax authorities 6395709 Use and availability of comparable information 6405710 Limitation of double taxation and competent authority proceedings 6405711 Advance pricing agreements (APAs) 6405712 Liaison with customs authorities 6415713 OECD issues 6415714 Thin capitalisation 641

5 8 Singapore 6425801 Introduction 6425802 Statutory rules 6425803 Other regulations 6465804 Legal cases 6475805 Burden of proof 6475806 Tax audit procedures 6475807 Revised assessments and the appeals procedure 6475808 Additional tax and penalties 6475809 Resources available to the tax authorities 6485810 Use and availability of comparable information 6485811 Limitation of double taxation and competent authority proceedings 6485812 Advance pricing agreements (APAs) 6485813 Management services 6485814 Business profits 649


xxxviii

59 Slovakia 6505901 Introduction 6505902 Corporate income tax 6505903 Value added tax 6525904 Other taxes 6525905 Customs 6525906 Tax inspection procedures 6525907 Anticipated developments 653

60 Slovenia 6546001 Introduction 6546002 Statutory rules 6546003 Other regulations 6566004 Legal cases 6576005 Burden of proof 6576006 Tax audit procedures 6576007 Additional tax and penalties 6576008 Resources available to the tax authorities 6586009 Use and availability of comparable information 6586010 Risk transactions or industries 6586011 Advance pricing agreements (APAs) 6586012 Anticipated developments in law and practice 6586013 OECD issues 6596014 Joint investigations 6596015 Thin capitalisation 6596016 Management services 659

61 Spain 6616101 Introduction 6616102 Statutory rules 6616103 Documentation 6626104 Legal cases 6636105 Management services and R&D cost sharing arrangements 6646106 Burden of proof 6656107 Tax audit procedures 6666108 The audit procedure 6666109 Revised assessments and the appeals procedure 6676110 Additional tax and penalties 6676111 Resources available to the tax authorities 6686112 Use and availability of comparable information 6686113 Risk transactions or industries 6686114 Limitation of double taxation and competent authority proceedings 6696115 Advance pricing agreements (APAs) 6696116 Anticipated developments in law and practice 6706117 Liaison with customs authorities 6706118 OECD issues 670

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6119 Joint investigations 6706120 Thin capitalisation 671

62 Sweden 6736201 Introduction 6736202 Statutory rules 6736203 Other regulations 6736204 Legal cases 6746205 Burden of proof 6746206 Documentation requirements 6756207 The audit procedure 6756208 Revised assessments and the appeals procedure 6766209 Additional tax and penalties 6766210 Resources available to the tax authorities 6766211 Use and availability of comparable information 6766212 Risk transactions or industries 6766213 Limitation of double taxation and competent authority proceedings 6776214 Advance pricing agreements (APAs) 6776215 Anticipated developments in law and practice 6786216 Liaison with customs authorities 6786217 OECD issues 6786218 Joint investigations 6786219 Thin capitalisation 678

63 Switzerland 6796301 Introduction 6796302 Statutory rules 6796303 Other regulations 6796304 Legal cases 6806305 Burden of proof 6806306 Tax audit procedures 6806307 The audit procedure 6816308 Revised assessments and the appeals procedure 6816309 Additional tax and penalties 6816310 Resources available to the tax authorities 6816311 Use and availability of comparable information 6816312 Risk transactions or industries 6826313 Limitation of double taxation and competent authority proceedings 6826314 Advance pricing agreements (APAs) 6826315 Anticipated developments in law and practice 6826316 Liaison with customs authorities 6826317 OECD issues 6836318 Joint investigations 6836319 Thin capitalisation 6836320 Management services 683

64 Taiwan 6846401 Introduction 684


xl

6402 Statutory rules 6846403 Burden of proof 6856404 Documentation 6856405 Audit targets 6866406 The audit procedure 6876407 Revised assessments and the appeals procedure 6886409 Advance pricing agreements (APAs) 6896410 OECD issues 6906411 Special topics 690

65 Thailand 6926501 Introduction 6926502 Statutory rules 6926503 Components of the Transfer Pricing Guidelines 6936504 Legal cases 6936505 Burden of proof 6946506 Tax audit procedures 6946507 Revised assessments and the appeals procedure 6956508 Additional tax and penalties 6966509 Resources available to the tax authorities 6966510 Use and availability of comparable information 6966511 Risk transactions or industries 6976512 Limitation of double taxation and competent authority proceedings 6976513 Advance pricing agreements (APAs) 6976514 Liaison with customs authorities 6986515 OECD issues 6986516 Joint investigations 6986517 Thin capitalisation 6986518 Management services 698

66 Turkey 7006601 Introduction 7006602 Statutory rules 7006603 Tax havens 7026604 Deemed dividends 7036605 Adjustments 7036606 Documentation requirements 7036607 Other regulations 7056608 Legal cases 7056609 Burden of proof 7066610 Tax audit procedures 7066611 Revised assessments and the appeals procedure 7066612 Additional tax and penalties 7066613 Resources available to the tax authorities 7076614 Use and availability of comparable information 7076615 Risk transactions or industries 7076616 Limitation of double taxation and competent authority proceedings 707

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6617 Advance pricing agreements (APAs) 7076618 Anticipated developments in law and practice 7086619 Liaison with customs authorities 7086620 OECD issues 7086621 Thin capitalisation 7086622 Management services 709

67 United Kingdom 7106701 Introduction 7106702 Statutory rules 7106703 Other regulations and guidance 7146704 Legal cases 7176705 Burden of proof 7186706 Tax audits 7196707 Information powers 7236708 Revised assessments and the appeals procedure 7246709 Additional tax and penalties 7246710 Resources available to the tax authorities 7286711 Use and availability of information on comparables 7286712 Risk transactions or industries 7296713 Limitation of double taxation and competent authority proceedings 7296714 Advance pricing agreements (APAs) 7316715 Anticipated developments in law and practice 7346716 Liaison with customs authorities 7346717 OECD issues 7346718 Joint investigations 7346719 Thin capitalisation 7346720 Management services 736

68 Uruguay 7376801 Introduction 7376802 Statutory rules 7376803 Other regulations 7396804 Legal cases 7406805 Burden of proof 7416806 Tax audit procedures 7416807 Revised assessments and the appeals procedure 7426808 Additional tax and penalties 7426809 Resources available to the tax authorities 7426810 Use and availability of comparable information 7436811 Risk transactions or industries 7436812 Limitation of double taxation and competent authority proceedings 7436813 Advance pricing agreements (APAs) 7446814 Anticipated developments in law and practice 7446815 Liaison with customs authorities 7446816 OECD issues 7446817 Joint investigations 744


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6818 Thin capitalisation 7446819 Management services 745

69 Uzbekistan 7466901 Introduction 7466902 Statutory rules 7466903 Other regulations 7466904 Legal cases 7466905 Burden of proof 7466906 Tax audit procedures 7466907 Revised assessments and the appeals procedure 7466908 Additional tax and penalties 7466909 Resources available to the tax authorities 7466910 Use and availability of comparable information 7466911 Risk transactions or industries 7476912 Limitation of double taxation and competent authority proceedings 7476913 Advance pricing agreements (APAs) 7476914 Anticipated developments in law and practice 7476915 Liaison with customs authorities 7476916 OECD issues 7476917 Joint investigations 7476918 Thin capitalisation 7476919 Management services 747

70 Venezuela 7487001 Introduction 7487002 Statutory rules 7487003 Legal cases 7507004 Burden of proof 7517005 Tax audit procedures 7517006 Additional tax and penalties 7527007 Resources available to the tax authorities 7527008 Use and availability of comparable information 7527009 Risk transactions or industries 7537010 Limitation of double taxation and competent authority proceedings 7547011 Advanced pricing agreements (APAs) 7547012 Anticipated developments in law and practice 7547013 Liaison with customs authorities 7547014 OECD issues 7547015 Joint investigations 7557016 Thin capitalisation 755

71 Vietnam 7567101 Introduction 7567102 Statutory rules 7577103 Other regulations 7627104 Legal cases 763

7105 Burden of proof 7637106 Tax audit procedures 7637107 The transfer pricing audit procedure 7647108 Revised assessments and the appeals procedure 7657109 Additional tax and penalties 7657110 Resources available to the tax authorities 7657111 Use and availability of comparable information 7667112 Risk transactions or industries 7667113 Limitation of double taxation and competent authority proceedings 7667114 Advance pricing agreements (APAs) 7677115 Anticipated developments in law and practice 7677116 Liaison with customs authorities 7677117 OECD issues 7677118 Joint investigations 7677119 Thin capitalisation 767

Appendix 1: Functional analysis questions 768FUNCTIONS ANALYSIS 768RISK ANALYSIS 774INTANGIBLE ANALYSIS 775

Appendix 2: Examples of databases for use in identifyingcomparative information 777

Appendix 3: US – Proposed service regulations 778Benefit test 778Overview of proposed transfer pricing methods 778The comparable uncontrolled services price method (CUSPM) 778The gross services margin method (GSMM) 779The cost of services plus method (CSPM) 779The comparable profits method (CPM) 779The profit split method (PSM) 779The simplified cost-based method (SCBM) 780Intangibles ownership and enhancements 781Contingent payment contractual terms 781Allocation of costs 782Conclusion 782

INDEX 783

Contents

xliii

PART I

DEVELOPING DEFENSIBLETRANSFER PRICING POLICIES

1 Introduction

101 At the eye of the “perfect storm”The explosion in volume of international transactions, the growth of national treasurydeficits and the frequent use of the phrase transfer pricing in the same sentence astax shelters and tax evasion on the business pages of newspapers around the worldhave left multinational enterprises, for whom international transactions are simplyan every day business necessity, at the centre of a storm of controversy. Tax authoritieshave made the regulation and enforcement of the arm’s length standard a top priority(see section 701ff. for commentary on the audit approach to pricing matters in anumber of countries). A key incentive for challenging taxpayers on their transfer pricesis that the authorities see transfer pricing as a soft target with the potential to producevery large increases in tax revenues. Since there is no absolute rule for determiningthe right transfer price for any kind of international transaction with associatedenterprises, whether it involves tangibles, intangibles, services, financing or costallocation/sharing arrangements, there is huge potential for disagreement as towhether the correct amount of taxable income has been reported in a particularjurisdiction. While the existence of tax treaties between most of the world’s majortrading nations might lead the casual observer to conclude that international transferpricing is a “zero sum game” where an adjustment in one jurisdiction will be matchedby the granting of corresponding relief at the other end of the transaction, the realityis that transfer pricing controversies are expensive and time consuming to deal with,not to mention full of pitfalls for the unwary that frequently result in double taxation ofincome.

The impact of this focus by governments has been to create a very uncertainoperating environment for businesses, many of whom are already struggling withincreased global competition, escalating operating costs and the threat of recession.Add to this accounting rule changes, which often create tension between theeconomist’s viewpoint that there are many different possible outcomes to any transferpricing analysis, a number of which may be acceptable and some of which may not,with the accountants need for a single number to include in reported earnings andyou have what many commentators have termed the “perfect storm” which threatens:

the risk of very large local tax reassessments;

the potential for double taxation because income has already been taxedelsewhere and relief under tax treaties is not available;

significant penalties and interest on overdue tax;

the potential for carry forward of the impact of unfavourable Revenuedeterminations, creating further liabilities in future periods;

secondary tax consequences adding further cost – for example the levy ofwithholding taxes on adjusted amounts treated as constructive dividends;

2 International transfer pricing 2009

uncertainty as to the group’s worldwide tax burden, leading to the risk ofearnings restatements and investor lawsuits;

conflicts with customs and indirect tax reporting requirements;

conflicts with regulatory authorities; and

damage to reputation and diminution of brand value as a consequence of theperception of being a bad corporate citizen.

102 The need for adequate planning and documentation of transferpricing policies and procedures

Typically the life cycle of a global transfer pricing policy involves an initial detailedanalysis of the underlying facts and economics, evaluation and development of theproposed policy in relation to the groups’ global tax planning objectives, a detailedimplementation and monitoring plan, and the adoption of a defensive strategy giventhe virtual inevitability that someone, somewhere will want to challenge the result.Probably the biggest challenge inherent in this whole process is the need to balancethe conflicting goals of being able to achieve a very high standard of compliance withthe myriad of rules and regulations that have flourished in the many differentjurisdictions in which a multinational may operate, with the need to manage the levelof taxes paid on a global basis at a competitive level. In the current hostile environmentthere is no “play safe” strategy – taxpayers must assume that they will be subject tochallenge no matter how conservative a philosophy they may initially adopt in theirtransfer pricing policies and procedures.

Most of the world’s major trading nations now have detailed requirements for thedocumentation of transfer pricing matters, but even those that have not yetimplemented specific requirements will expect taxpayers to be able to explain andproduce support for the positions taken on local tax returns, and to show that theyconform to arm’s length results. One important trend that is emerging is based on therealisation that in such a volatile area, the only clear path to certainty lies in advancediscussions with the authorities. Tax rulings and advance pricing agreements (APAs),once thought to be solely the realm of the biggest and most sophisticated taxpayersare increasingly being seen as an everyday defensive tool.

The planning process can also provide an excellent forum for gathering informationabout the business and identifying tax and commercial opportunities that have hithertogone unnoticed. The development of a transfer pricing policy will involve financial, taxand operational personnel and therefore provides a useful opportunity for a variedgroup to communicate their respective positions and assess business priorities.Implementation is also an area that will require cross functional cooperation within amultinational enterprise since success will ultimately be determined by an ability toensure that the policies and procedures adopted are fully aligned with the underlyingbusiness activities and that the results are reliably reported on the books and recordsof the entities undertaking the transactions.

103 Keeping policies and procedures up to dateA pricing policy cannot be established, set in stone and then ignored. If it is to haveany value, the policy must be responsive to an increasingly dynamic and turbulentbusiness environment and must be reviewed on an ongoing basis, at a minimum

Introduction 3

whenever the group’s business is restructured or new types of transactions arecontemplated. This should not be an onerous task if it is performed by appropriatepersonnel who are well-briefed on the aims of the analysis and any necessaryamendments to the policy are implemented quickly. An updating of the transfer pricingpolicy should form part of the routine process of reviewing the overall businessstrategy. Regular and as-needed policy updates can help to ensure that the policycontinues to cover all inter-company transactions undertaken by the company, aswell as produce arm’s length results and prevent unwelcome surprises.

104 Theory and practiceThe theory on which a perfect pricing policy is based has been much discussed inrecent years. This book, while recognising the need for theoretical guidelines, focuseson how to establish a successful transfer pricing policy in practice. This is achievedby explaining to the reader the broad principles to be applied in establishing transferpricing policies that would be acceptable under the generally recognised Organisationfor Economic Co-operation and Development (“OECD”) principles. The book alsoindicates, through a number of country studies, the areas in which such generalpractice might need to be amended slightly to meet the requirements of local countrylaw. The degree to which such local amendments will need to be made will undoubtedlychange over time and there can be no substitute for current advice from local expertsin looking at such matters. In many cases, however, the general principles laid downin this text will satisfy the local law.

105 Transfer pricing is not just about taxationIn addition to evaluating the risks of tax controversies in advance, careful advanceplanning for transfer pricing also allows a multinational enterprise to considerimplications beyond taxation. For instance, the effect on corporate restructuring,supply chain, resource allocation, management compensation plans andmanagement of exposure to third party legal liabilities must also be considered.

The implications of transfer pricing policies in the fields of management accountingand organisational behaviour have been the subject of an increasing volume ofacademic debate; for example, there may be a significant influence on the actions ofmanagers who are remunerated by a bonus linked to local company operating profits.A change in a group transfer pricing policy that fails to recognise the impact that maybe felt by individual employees may not bring about the behavioural improvementsmanagement wish to achieve.

Legal matters that fall under the corporate general counsel’s office should also betaken into account. Matters such as intellectual property protection arising from costsharing, treasury management issues arising from centralised activities such ascash pooling and areas of logistics and inventory management in coordination centrearrangements all require careful consideration. In some cases there may be conflictbetween the tax planner’s desire to locate certain functions, risks and assets in onejurisdiction and the lawyer’s need to have recourse to the legal system of another.

Ultimately, transfer pricing policy should benefit a company from a risk managementas well as business perspective. To this end, building a foundation of internal supportby the multinational is imperative in order to enable compliance with tax regulationsas well as effective management decision making.

4 International transfer pricing 2009

106 The legacy of the 1990sIn 1994-95 timeframe, the US broke new ground with regulations on intangibles,tangibles and cost sharing. These regulations evoked widespread reaction amongstthe international community. Many commentators perceived that the US Regulationswere a departure from the arm’s length standard. The OECD responded by publishingnew chapters on the adoption of the arm’s length principle in 1995, the provision ofstandards of comparability emphasising functions performed, risks assumed andassets employed; the need for taxpayer documentation of the arm’s length characterof its transfer pricing; and the role played by penalties in encouraging tax compliance.The following year, further material was published on ‘Special Considerations forIntangible Property’ and ‘Special Considerations for Intra-Group Services’. A chapteron ‘Cost Contribution Arrangements’ was released in late 1997. The work of theOECD was a trendsetter for several other countries which introduced transfer pricinglegislation revolving around the OECD Guidelines in quick succession.

A decade later, with more concrete Revenue and taxpayer experience behind it, theUS is revisiting the regulations pertaining to services, intangibles and cost sharing.New temporary regulations pertaining to services and dealing specifically with theservices cost method are presently in force and regulations relating to intangiblesand cost sharing have been proposed. In the meanwhile, the OECD is reviewingaspects of comparability and the use of transactional profit methods in more detail.Recently the OECD has also issued revised public discussion drafts of four parts ofits ‘Report on the Attribution of Profits to Permanent Establishments’ (also referredto herein as PE) and a new discussion draft dealing with ‘Transfer Pricing Aspects ofBusiness Restructurings’.

107 The futureAround the world legislative change continues unabated. Transfer pricing rules haverecently been introduced or reformed in a number of countries, while many othercountries are in the process of reviewing the effectiveness of their existing transferpricing rules and practices. In parallel, Revenue authorities are stepping up the paceof transfer pricing audits, presenting fresh challenges of policy implementation anddefence to the taxpayer. Issues that may trigger a transfer pricing investigation mayinclude:

corporate restructurings, particularly where there is downsizing of operationsin a particular jurisdiction;

significant inter-company transactions with related parties located in taxhavens, low tax jurisdictions or entities that benefit from special tax regimes;

deductions claimed for inter-company payments of royalties and/or servicefees, particularly if this results in losses being claimed on the local tax return;

royalty rates that appear high in relative percentage terms, especially whereintellectual property that is not legally registered may be involved;

inconsistencies between inter-company contracts, transfer pricing policiesand detailed transaction documents such as inter-company invoices and/orcustoms documentation;

separation of business functions and related risks that are contractuallyassigned to a different jurisdiction;

frequent revisions to transfer pricing policies and procedures;

recurring year-end pricing adjustments, particularly where they may createbook/tax differences;

failure to adopt a clear defence strategy; and

simply not paying any taxes.

It must be presumed that the pace of change will be maintained, and that it may evenincrease due to budgetary pressures on governments. A multinational enterprisemust maintain continual vigilance to ensure that its transfer pricing policies meet themost up to date standards imposed by tax authorities around the world and alsocontinue to meet its own business objectives.

The immediate future presents great challenges to both taxpayers and taxauthorities. Taxpayers must cope with legislation that is growing by the day acrossjurisdictions, and which is often not consistent. For instance, safe harbour rules inone jurisdiction may resent a non-controversial alternative and yet could be counteredin the other contracting country. Similar difficulties are encountered while dealing withthe fundamental definition of arm’s length range, which continue to have differinglegislative meanings and judicial interpretations. The onus is on the taxpayer toestablish arm’s length transfer pricing by way of extensive country-specificdocumentation. Failure to do so will inevitably result in the realisation of some or allof the threats listed above. It is not enough for taxpayers to honestly believe they havethe right answer – they will also need to be able to demonstrate that it is.

Tax authorities are to some extent in competition with their counterparts fromother transacting jurisdictions in order to secure what they perceive to be their fairshare of taxable profits of multinational enterprises. This frequently leads to doubletaxation of the same profits by Revenue Authorities of two or more transactingcountries. Consequently, there is also an increasing trend towards tax authoritiesfavouring the use of bilateral Advance Pricing Agreements where they are available.Another trend being witnessed is the rise in the number of disputes going to theCompetent Authorities for resolution under the Mutual Agreement procedures ofbilateral tax treaties. On the other hand, transfer pricing is also an anti-avoidanceissue and to this end, tax authorities have to work together to ensure that the increasingtrade and commerce by multinational enterprises and their ability to allocate profitsto different jurisdictions by controlling prices in intra-group transactions does notlead to tax evasion, for example, through the use of non arm’s length prices, theartificial use of tax havens and the use of other types of “tax shelters”. Inevitably therewill have to be trade-offs between these conflicting considerations.

Introduction 5

2 Categories of inter-companytransfer

201 IntroductionThere are many types of inter-company transactions. These include transfers oftangible and intangible property, the provision of services, as well as inter-companyfinancing, rental and leasing arrangements or even an exchange (of say, property forservices or the issue of sweat equity). It is important to note that it is the substanceof the situation that will always determine whether or not a transaction has takenplace, rather than whether an invoice has been rendered. For instance, managementservices may be delivered through the medium of a telephone call between executivesof a parent company and its subsidiary. In this example, a service has been performedthat the provider had to finance in the form of payroll costs, phone charges, overheads,etc, and the service itself will be of value to the recipient in the form of the advicereceived. Thus, a transaction has taken place for transfer pricing purposes eventhough, at this stage, no charge has been made for the service. Transfer pricing rulestypically require related entities to compensate each other appropriately so as to becommensurate with the value of property transferred or services provided wheneveran inter-company transaction takes place. The basis for determining propercompensation is, almost universally, the arm’s length principle.

202 The arm’s length principleSimply stated, the arm’s length principle requires that compensation for any inter-company transaction conform to the level that would have applied had the transactiontaken place between unrelated parties, all other factors remaining the same. Althoughthe principle can be simply stated, the actual determination of arm’s lengthcompensation is notoriously difficult. Important factors influencing the determinationof arm’s length compensation include the type of transaction under review, as well asthe economic circumstances surrounding the transaction. In addition to influencingthe amount of the compensation, these factors may also influence the form of thepayment. For example, a given value might be structured either as a lump-sumpayment or a stream of royalty payments made over a predetermined period.

This chapter summarises the various types of inter-company transfers and theprinciples that may be applied to determine the proper arm’s length compensation forthese transactions. The application of the arm’s length principle is discussed indetail in Chapters 3 and 4.

203 Sales of tangible property – definitionTangible property refers to all the physical assets of a business. Sales of raw materials,work in progress and finished goods represent a major portion of the transfers thattake place between related parties, typically referred to as sales of inventory (seeSection 205). However, it is important to bear in mind that ‘sales of tangible property’

Categories of inter-company transfer 7

can include all the machinery and equipment employed by businesses in their day-to-day activities as well as the goods they produce.

204 Sales of machinery and equipmentMachinery and equipment is frequently provided to manufacturing affiliates by theparent company. For example, this may be a means of providing support to an existingsubsidiary or it may be in the form of the sale of complete manufacturing lines to anew company in a ‘greenfield’ situation. The equipment may have been purchasedfrom an unrelated company, manufactured by the parent or might be older equipmentthat the parent (or another manufacturing affiliate) no longer needs. Tax rules generallyrequire that the transferor of this equipment (whether new or used, manufactured orpurchased) should receive an arm’s length consideration for the equipment. This isgenerally considered to be the fair market value of the equipment at the time oftransfer.

While the tax treatment of plant and machinery transfers is generally as above, itis worth noting that there can be circumstances where an alternative approach mightbe adopted. Such circumstances usually arise in connection with general businessrestructuring or, perhaps, when a previously unincorporated business (or an overseasbranch of a company) is transferred into corp

Documents

International · International transfer pricing 2009 iv Nick Raby is the principal in charge of transfer pricing services for PricewaterhouseCoopers in the Western Region of the United